Prepayment Rights: Difference between revisions
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{{REVIEWEDPLS | reviewer = [[Alison Ward]]|date= August 2018}}{{Consumer and Debt Law TOC|expanded = | {{REVIEWEDPLS | reviewer = [[Alison Ward]]|date= August 2018}}{{Consumer and Debt Law TOC|expanded = mortgages}} | ||
'''Prepayment rights''' enable a borrower to pay off or pay down a debt earlier than when periodic payments are due. | '''Prepayment rights''' enable a borrower to pay off or pay down a debt earlier than when periodic payments are due. | ||
== Client problems == | == Client problems == | ||
* | * Client wants to pay off a mortgage and wants to know if they can do this and how much has to be paid.
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* Client wants to pay off a consumer loan or a credit card account and wants to know if they can do this and how much has to be paid.
| * Client wants to pay off a consumer loan or a credit card account and wants to know if they can do this and how much has to be paid.
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== Summary of the law== | == Summary of the law== | ||
[[File:Consumer_Law_and_Debt_-_Prepayment_Rights.jpg|thumb|275px|right| link=| <span style="font-size:50%;">Image via www.istockphoto.com</span>]] | |||
In common law, parties can set out a variety of terms in a credit agreement. One important term is whether the borrower is allowed to pay off or pay down the obligation earlier than when the periodic payments (for example, the monthly payments) are due. This is called the right of prepayment. | In common law, parties can set out a variety of terms in a credit agreement. One important term is whether the borrower is allowed to pay off or pay down the obligation earlier than when the periodic payments (for example, the monthly payments) are due. This is called the right of prepayment. | ||
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Prepayment rights for consumer loans and consumer credit card accounts are governed by [https://www.canlii.org/en/bc/laws/stat/sbc-2004-c-2/latest/sbc-2004-c-2.html#sec74_smooth section 74] of the ''Business Practices and Consumer Protection Act'' and Regulations. (In addition, certain aspects of prepayment for bank loans are covered in the federal [http://canlii.ca/t/7vqm ''Bank Act''] and Regulations.) | Prepayment rights for consumer loans and consumer credit card accounts are governed by [https://www.canlii.org/en/bc/laws/stat/sbc-2004-c-2/latest/sbc-2004-c-2.html#sec74_smooth section 74] of the ''Business Practices and Consumer Protection Act'' and Regulations. (In addition, certain aspects of prepayment for bank loans are covered in the federal [http://canlii.ca/t/7vqm ''Bank Act''] and Regulations.) | ||
Prepayment rights are rights for individual consumers only, not incorporated companies. The rights do not apply to individuals who enter into credit arrangements for business purposes. They do apply where there is a security agreement in addition to the borrower’s promise to pay. | Prepayment rights are rights for individual consumers only, not incorporated companies. The rights do not apply to individuals who enter into credit arrangements for business purposes. They do apply where there is a [[Security Agreements|security agreement]] in addition to the borrower’s promise to pay. | ||
There are two important aspects to [https://www.canlii.org/en/bc/laws/stat/sbc-2004-c-2/latest/sbc-2004-c-2.html#sec74_smooth section 74] of the ''Business Practices and Consumer Protection Act''. The first is that consumers are given a statutory right to prepay any credit agreement to which the Act applies, except mortgages on land. Consumers can prepay some or all of a credit agreement. Under [https://www.canlii.org/en/bc/laws/stat/sbc-2004-c-2/latest/sbc-2004-c-2.html#sec3_smooth section 3] of the Act, this statutory right to prepay cannot be waived by a borrower — it is a right, no matter what the credit contract says about prepayment. The creditor cannot charge for prepayment, whether full or partial. | There are two important aspects to [https://www.canlii.org/en/bc/laws/stat/sbc-2004-c-2/latest/sbc-2004-c-2.html#sec74_smooth section 74] of the ''Business Practices and Consumer Protection Act''. The first is that consumers are given a statutory right to prepay any credit agreement to which the Act applies, except [[Mortgages and Foreclosure|mortgages on land]]. Consumers can prepay some or all of a credit agreement. Under [https://www.canlii.org/en/bc/laws/stat/sbc-2004-c-2/latest/sbc-2004-c-2.html#sec3_smooth section 3] of the Act, this statutory right to prepay cannot be waived by a borrower — it is a right, no matter what the credit contract says about prepayment. The creditor cannot charge for prepayment, whether full or partial. | ||
The second important aspect to section 74 is that it regulates how much of the non-interest finance charges the creditor can require as part of accepting a prepayment. For full prepayment, the creditor must refund the prescribed portion of any non-interest finance charges paid by the borrower or added to the outstanding balance. | The second important aspect to section 74 is that it regulates how much of the non-interest finance charges the creditor can require as part of accepting a prepayment. For full prepayment, the creditor must refund the prescribed portion of any non-interest finance charges paid by the borrower or added to the outstanding balance. | ||
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Prepayment rights for mortgages on land are governed by [https://www.canlii.org/en/ca/laws/stat/rsc-1985-c-i-15/latest/rsc-1985-c-i-15.html#sec10_smooth section 10] of the ''Interest Act'' (Canada). Under that section, consumers have more limited rights of prepayment than for non-mortgage agreements governed by the [http://canlii.ca/t/84mr ''Business Practices and Consumer Protection Act'']. Basically, there is no statutory right of prepayment where the term of the mortgage is five years or less. For example, a borrower does not have a statutory right to prepay a closed mortgage with a three-year term. If the borrower wants to pay out the mortgage, they must negotiate with the lender. In general, lenders are unwilling to allow a mortgage prepayment without at least some additional interest being paid if current interest rates are lower than the rate agreed to in the mortgage. The lender may well insist that all the interest over the term of the mortgage be paid. This makes prepayment expensive and uneconomic, particularly in the early part of the term of the mortgage. | Prepayment rights for mortgages on land are governed by [https://www.canlii.org/en/ca/laws/stat/rsc-1985-c-i-15/latest/rsc-1985-c-i-15.html#sec10_smooth section 10] of the ''Interest Act'' (Canada). Under that section, consumers have more limited rights of prepayment than for non-mortgage agreements governed by the [http://canlii.ca/t/84mr ''Business Practices and Consumer Protection Act'']. Basically, there is no statutory right of prepayment where the term of the mortgage is five years or less. For example, a borrower does not have a statutory right to prepay a closed mortgage with a three-year term. If the borrower wants to pay out the mortgage, they must negotiate with the lender. In general, lenders are unwilling to allow a mortgage prepayment without at least some additional interest being paid if current interest rates are lower than the rate agreed to in the mortgage. The lender may well insist that all the interest over the term of the mortgage be paid. This makes prepayment expensive and uneconomic, particularly in the early part of the term of the mortgage. | ||
Where the term of the mortgage is for more than five years, the borrower effectively does have a right of prepayment. Section 10 of the Interest Act says that if a creditor refuses a prepayment offer, the borrower is not obliged to pay any further interest. There are two important qualifications to this prepayment right: | Where the term of the mortgage is for more than five years, the borrower effectively does have a right of prepayment. Section 10 of the ''Interest Act'' says that if a creditor refuses a prepayment offer, the borrower is not obliged to pay any further interest. There are two important qualifications to this prepayment right: | ||
* the prepayment can only be made after the first five years of the mortgage, and
| * the prepayment can only be made after the first five years of the mortgage, and
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* the borrower has to pay three months’ worth of interest in addition to the principal amount.
| * the borrower has to pay three months’ worth of interest in addition to the principal amount.
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== Related topics and materials== | == Related topics and materials== | ||
See other sections on mortgages and secured loans: | See other sections on mortgages and secured loans: | ||
* Mortgages and | * [[Mortgages and Foreclosure|Mortgages and Foreclosures]] | ||
* Security | * [[Security Agreements]]
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See related topics: | See related topics: | ||
* Contracts Overview
| * [[Contracts Overview]]
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* Interest and the Cost of Borrowing | * [[Interest and the Cost of Borrowing Money]]
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{{Consumer and Debt Law Navbox|type = debt}} | {{Consumer and Debt Law Navbox|type = debt}} | ||
